This paper explores the impact of the recent soar in world commodity prices on economic activity and household welfare in Tanzania, and the possible policy responses to that shock. The analysis is based on a single country computable general equilibrium model that includes considerable factor market and household details, as well as marketing margins between producers, consumers and foreign markets. Results indicate that the Tanzanian economy may fail to benefit from the opportunities arising from the increase in world agricultural prices, as this would imply a considerable reduction in most production activities, but the few that are directly export oriented. Policies can counteract only to a limited extent these negative impacts. Tariff and domestic tax reductions show some desirable results, albeit small in size, while export taxes further depress the domestic economy. Injections of foreign resources fail to stimulate domestic production. Structural bottlenecks deeply affect the results: a reduction of the high marketing margins would improve the ability of the economy to adapt to any change in world prices.


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